A deeper scrutiny of a nation’s ‘balance of payments’ position presents a reasonably credible picture of its overall trade and investment position. It can also identify prospects for enhancing the nation’s economic integration levels with the rest of the world.
While the Current Account Balance shows one’s trade position (along with information on other variables like net unilateral transfers, and factor in income earned from abroad), the Capital Account Net Balance helps to illustrate the net mobility of capital flows — from or to the nation, and within or across the key performing sectors — circulating in the form of portfolio and direct investment.
India’s Current Account Balance (Past 5 Years)
India’s Current Account position over the last five years (see Figure 1.1 and 1.2 below), from a macroeconomic viewpoint, presents a disappointing trend thus far. Weak macroeconomic fundamentals, surfacing from the gradual slowdown in aggregate productivity levels, have seriously dampened India’s overall trade position too, which, in spite of seeing a fall in imports in the period of 2013-2015 (helped by falling import costs of crude oil at the time), had a weak export position across product categories.
India’s Balance of Payments Position
It is crucial to recognise, that in the case of India’s Balance of Payments position, in the decades after the early ‘90s, a weak trade position has often been complemented with a stronger capital account position (with higher mobility of short to medium term foreign capital flows into Indian sectors), allowing the Rupee-pegged exchange rates to appreciate over time.
However, in the last five to six years, as we can see below (Figure 2), the net capital account balance (calculated in USD) too has become increasingly volatile, and witnessed a negative trend. It was left with a limited role in strengthening the Balance of Payments position — a trend that was seen in the past.
Tackling India’s Weak Trade Position
For now, and the near future, tackling the weak trade position — especially on the side of exports — remains a major challenge for the current government. It might be prudent to also see this issue structurally entwined with other macro concerns like unemployment, low-earning growth for medium to small scale enterprises (targeting for exports), and declining real wage growth rates (within agro-based, manufacturing segments).
Observations drawn below in the three charts are based on product and partner-wise export trends. This can help in understanding areas of possibilities for certain categories of Indian goods, that the policy-makers can target to leverage. This move can further strengthen India’s terms of trade, and the level of direct economic dependence with high-trading countries, along with those in the neighbourhood and the ASEAN bloc.
The Great Indian Export ‘Potential’ – But ‘No Export’?
A deeper look into the product-wise categories of exports from India to all exporting partners over the last five years (Figure 3), shows a substantive decline in overall exports — sharpening since 2015.
Still, the major comparative advantage until 2013, offers a greater potential for exports in the segments of consumer goods (with export share at 44 percent in 2017); intermediate products including automotive components (export share at 33 percent); fuels (12 percent) along with other product categories like capital goods (13 percent), stone and glass products (export share at 15 percent), and chemicals (approximately 13 percent share).
The export share figures for other products remain troubling, especially within the food sector (export share for vegetables being at 6 percent).
Considering more than 50 percent of the rural population engages in producing primary agro-based goods, they have a dismal representation in key exports (including for related goods from animal husbandry, wood and other raw materials). Another critical area where export potential (and demand for Indian products) is high but supply-side bottlenecks have inhibited its rise in export production, is the textile and clothing segment (export share being at 12.6 percent in 2017).
India’s Neighbours & Buyers
In terms of partner-wise export performance, Figures 4 and 5 help understand the partner-wise share of India’s trade performance level with top partners in the world, rising importers from India in its neighbourhood, and those from the ASEAN trade bloc (Figure 4).
Figure 5 provides a region-wise export position for all Indian exports.
The focus on some of the key neighbouring countries (like Bangladesh, Bhutan, Nepal, Sri Lanka, Afghanistan and UAE) along with ASEAN members (like Thailand, Vietnam etc.) remains critical from the perspective of India’s geographical proximity to each of these nations, as well as in terms of an observed rise in export demand (and interest) for Indian products — especially in the areas of agro-based products (within South Asia), manufacturing, and automotive segments.
Having said that, in terms of overall export volume from a regional level (Figure 5), it can be seen that India’s highest exports are to the East Asian nations and Pacific region, followed by Middle East and North Africa, and then to Europe and Central Asian nations.
In aggregate terms, India’s export volume to neighbours within South Asia, including countries like Sri Lanka, Nepal, Bhutan, Afghanistan (in spite of promising export trends seen in Figure 4), sees a dismally low region-level export base (lower to Sub-Saharan African region).
Pushing For An ‘Export-Supported’ Investment Strategy
Careful observation of the trade and export statistics (in Figure 3, 4, and 5) should have allowed the government in its Budget announcements to push for an ‘export-supported’ investment strategy, enabling producers with better export market access conditions by focusing on nations in the neighbourhood and those in the eastern bloc.
The existing comparative advantages would need to be further leveraged for this (in services, consumer goods, etc.), while other product categories (including digital sectors like ICT) need sufficient production space along with capital support to strengthen India’s overall competitiveness with other export-oriented economies.
A coordinated policy focus to ‘regionalise’ our export potential and ‘harmonise’ existing comparative advantages (across product categories), with steps to provide greater market access and infra-networks to producers, would help immensely in this regard.
(The author is Associate Professor of Economics, OP Jindal Global University. He is currently Visiting Professor, Department of Economics, Carleton University. He tweets @prats1810. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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